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Wednesday, 3 April 2013

Tunisia plans 1bn dinar sukuk

Tunisia is hoping that the country’s first government sukuk, or Islamic bond, scheduled for later this year could spur companies in the North African country to raise Islamic debt and boost its sharia-compliant finance industry.

The government is working alongside the Islamic Development Bank – the multilateral lender – to pave the way for a 1bn dinar ($700m) sukuk sale that would set a benchmark for companies seeking to tap the Islamic debt markets, Elyes Fakhfakh, finance minister, told the Financial Times.

North African countries including Egypt, Morocco and Tunisia are progressing with plans to stimulate Islamic finance and sell sharia-compliant debt as they seek new forms of funding in the wake of the Arab spring.

“It is for the global diversification of our financial debt and this is very interesting from a cost point of view,” Mr Fakhfakh said on the sidelines of an Arab finance ministers’ meeting in Dubai. He said the government would target 80 per cent external investors and 20 per cent domestic.

Governments have been keen to tap into Islamic finance partly because the cost of borrowing can be cheaper due to the high demand – a benefit Tunisia would like to see passed on to its companies.

Islamic debt of emerging market governments yielded 2.9 per cent on April 1, markedly lower than Middle East government conventional bonds which yielded 4.4 per cent, according to HSBC/Nasdaq Dubai indices.

The Islamic bonds of Gulf governments, which have led the way in Middle East sukuk sales, are also yielding slightly less than the conventional bonds, meaning the cost of borrowing is lower.

“If I was them I’d be thinking now’s the time to issue sukuk,” says Gabriele Sterne, senior economist at Exotix, the investment bank in London. “Because of all the money flooding around the Middle East, sukuk tend to price slightly tighter than eurobonds.”

Given the political volatility, if Tunisia does not get the timing right then it could face a situation like Egypt where spreads widen rapidly, increasing the cost of borrowing on international markets and making a sale more difficult, says Mr Sterne.

Since the start of the year, Tunisia’s credit default swaps – contracts to insure against the default on debt – have risen 37 basis points to 389, indicating an increased perception of risk. They trade at a similar level to Hungary, but are cheaper than the swaps of Egypt and Lebanon, indicating that investors view a Tunisian default as less likely.

Standard & Poor’s cut Tunisia’s credit rating in February, the third downgrade since the overthrow of Zine El Abidine Ben Ali in 2011. The country is now rated BB-, three levels below investment grade.

The lost of the investment-grade rating, slow economic growth and bank liquidity concerns may put investors off the government’s sukuk, meaning they will have to pay high borrowing costs, says Sebastien Henin, portfolio manager at The National Investor in Abu Dhabi.

“In this environment, to raise money, I think it could be tricky,” says Mr Henin, adding that strong broader demand for Middle East debt should secure the sale, albeit at a price.

The North African country, which ignited the Arab Spring, is also seeking a $1.7bn loan from the International Monetary Fund – a precautionary measure that might be taken if needed – which could help stabilise the economy and plans to issue US government-backed bonds.

The government expects economic growth to slow to 4 per cent this year compared with 3.6 per cent last year.

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